Despite a mixed political backdrop European stocks look set for further outperformance compared to the US, BNP Investment Partners (BNPIP) senior global investment strategist, Daniel Morris, told Australasian investors last week.
On a whirlwind tour of the Antipodes, Morris said the cyclical fundamentals in Europe support the growing recovery in the region that has been underway since the ‘Brexit’ vote last June.
“European markets have outperformed following Brexit and the US elections last year,” he said. “The question is will that momentum continue? We think it will.”
Morris said while part of the European renaissance was due to underperformance in the previous few years, the economic outlook for the Eurozone looked better than the US with signals such as purchasing manager orders on the up.
“Europe is in the middle of a cyclical recovery that the US has already been through,” he said. “And with US equity valuations so high, the [lower P/E] European markets offer much better earnings potential.”
However, Morris said Euro-skeptics could point out the same factors were in play prior to Brexit, when market returns were disappointing.
“What’s different now is sentiment,” he said. “Investors are more confident about the future of the Euro and the Eurozone.”
With the shock of Brexit fading (and its practical consequences kicked down the road for at least two years), Morris said investors have been buoyed by a more moderate election outcome in the Netherlands and strong signals that right-wing populist candidate, Marine Le Pen, would not win the upcoming presidential vote.
He said comparisons with the Brexit and Trump wins, where some blamed faulty pre-election polls, were not valid.
“Both the Brexit and US election polling showed the outcomes would be close,” Morris said. “But if you look at the possible results in the polls for the second round of the French presidential election, there’s a pretty wide gap.”
Nonetheless, with elections due in key Euro states of Italy and Germany over the next year he said concern about the political stability of the region was “not unwarranted, but exaggerated”.
“Politics always matter, but – while we’re aware of scenario-modeling – it’s not something you can easily plug into a spreadsheet.”
Overall, however, Morris said investor uncertainty around Europe has decreased while it had spiked up in the US.
At the same time, he said various countries within the Eurozone were facing a range of different challenges.
“There’s a fascinating divergence now between Spain and Italy,” Morris said. “Spain has the fastest forecast GDP growth for 2017, while Italy has the slowest.”
He said the difference in outlook was notable given the two southern European states were both in similar basket-case mode coming out of the GFC.
“How did this happen?” Morris said. “Spain did something to change the situation – it cleaned out its banks and embarked on significant labour market reforms.
“Italy did nothing.”
Country-specific data, though, does not generally feature in the BNPIP investment process, which takes a multi-asset approach to the region. The manager has both a short-term tactical Europe strategy (with a six-month outlook) and a medium-term approach (a five-to-seven year time horizon), which can diverge significantly in underlying holdings.
Morris said, for example, the current cyclical upturn in Europe contrasts against its longer-term structural issues such as aging populations.
“Those issues are not going away,” he said. “But Europe is a mature economy that, while it might not grow fast, remains a large part of global markets.
“You should always have a dynamic allocation to Europe. Right now might be a good time to be overweight.”
Based in London since 2008, the US-born Morris joined BNPIP in 2014 after a stint at JP Morgan in the UK.
As at 31 December 2016, BNPIP managed A$5.6 billion on behalf of Australian and New Zealand institutions and retail clients, and Eur560 billion globally.